15 July 2001

Turf war

Behind the scenes tensions have finally spilled into a very public slanging match between TAB Ltd – which conducts betting on racing - and the NSW Thoroughbred Racing Board (TRB) - which runs racing itself. At stake is the long term health of the multi-billion dollar wagering industry, and at issue is just who controls racing in its most populous state.

When NSW Treasurer Michael Egan announced the privatisation of the TAB and the so-called “Mums and dad’s” public float in June 1998, the Government signalled that it was sink or swim time for both the new public company and a racing industry that had grown fat on 30 years of public sector support. Three years later, signs that the relationship is under severe strain are manifest.

TAB Ltd executives fired the first public shot when they put a blueprint for the radical reform of racing to the media at a briefing at Sydney’s Wentworth Hotel on July 16. TAB chairman Gary Pemberton painted a picture of racing in NSW as an industry in “systematic decline”, one that is “evidently inefficient (and) has no plan for its future”. Racing, said Pemberton, had adopted a “cargo cult strategy, waiting for the tooth fairy to leave some money- through the government; the TAB; or through subsidies from… poker machines.”

“Those days are gone,” he concluded ominously.

Among a long list of complaints with how racing runs its own house, Pemberton saved special mention for “the worst aspect of all”: the “fundamentally flawed” distribution of funds from the NSW TRB to raceclubs, which he says is disproportionate to the amount of betting turnover each club generates. The system subsidises small country race clubs and doesn’t reward the more “innovative” (ie. profitable) provincial raceclubs. By TAB’s calculations, propping up inefficient raceclubs won’t stop 62 of them becoming insolvent by 2005.

“The formula actually makes individual clubs more profitable if they race less,” Pemberton told the briefing. As a starting point for change, the TAB favours such radical changes at the top, such as the merger of the Australian Jockey Club (AJC) and the Sydney Turf Club (STC), the closure of two Sydney racetracks, and restricting the running of expensive race meetings in the city to Saturdays only.

TAB Ltd’s interest in all this, argues Pemberton, is purely commercial: NSW supplies 40% of the racing ‘product’ that the publicly listed company bets on.
But by going public, and then taking their blueprint on a ‘road tour’ of individual raceclubs, TAB Ltd has drawn the fire of racing administrators who regard the ploy as merely a crude attempt to divide and conquer an industry that is famous for arguing amongst itself. Racing’s titular ruling body, the TRB, sees the TAB’s power play as not just encroaching on its turf, but mounting a direct challenge to its authority.

“They didn’t approach us in putting this blueprint together,” says TRB chairman, Tony Hartnell, “and I find it difficult to accept they would go public like this – creating headlines of a crisis in the industry – just to start a debating forum!”

TAB Ltd put its proposals to the AJC and the STC in a private meeting in March which again didn’t include the TRB. And Pemberton himself told the Wentworth briefing that, "we have no relationship with the TRB." However his managing director, Warren Wilson, has since told The Bulletin that the TRB chairman Hartnell “has an open invitation to come and see me.”

It’s unlikely the offer will be taken up soon: “Whichever way you look at it,” says Hartnell, “we didn’t start this dispute or go public with it. This controversy has been generated by the TAB going around saying it’s going broke!

“Racing is a community activity and is part of the mainstream social fabric of Australia. Why should a small country raceclub stop racing just because the TAB says it’s innefficient? We will never start closing clubs simply to prop up the TAB. If the TAB wants the racing industry to stop losing money it should bet on less meeetings!”

For his part, Wilson is playing a very injured party, and claims the media has “verballed” him and his chairman. “We don’t want to run racing,” Wilson protests. “We don’t have the power. All we’ve done is go around the place with some thought provoking ideas. It’s NOT a master plan, but that’s the headline!

“We said, can we have a look at your blueprint for the next five years? and they said they didn’t have one. So we put one together ourselves.

“All we are saying is, there is no tooth fairy, you are currently losing money – to the tune of $7.1 million dollars last financial year – and there is a limit to dropping prizemoney and cutting spending. If you want to turn this around then it’s time to have a look at yourself. We aren’t about advocating the absolute commercialisation of racing, but can you maintain the spirit of racing for half the cost?”


The backdrop to all this angst is a rapidly changing gambling environment that in the past decade has put horse racing behind the 8-ball. In 1989/90, Australia wide turnover on both wagering (horses, dogs and trots) and gaming (pokies, casinos, etc), totalled $10 billion apiece. In 1999/2000 wagering turnover had grown to just $11bn while turnover on pokies had skyrocketed to an astounding $101bn! (source: Tasmanian Gaming Commission)

It’s therefore obvious to the market that a company like Victoria’s TABCORP Holdings, which besides wagering, controls all gaming in Victoria, plus owns Sydney’s Star Casino, has much more potential for growth than NSW’s TAB Ltd, which is hamstrung by its reliance on a core business – wagering – which has little scope for long term growth. Last week TABCORP’s share price stood around $8.95, TAB Ltd’s at around $2.86.

In the half year to December 2000, TAB Ltd paid $94.5m in ‘product fees’ to the racing industry, and just $38.3m in profits to shareholders. Not surprisingly, with wagering considered a “mature” industry, TAB needs to expand its activities outside wagering to deliver a higher relative yield to shareholders.

And herein lies TAB Ltd’s predicament. It wants to expand into gaming, but its contract with the racing industry includes a so-called “co-investment” clause, giving racing the right to invest in all of TAB’s future wagering and gaming activities and take 25% of the pre-tax profits.  Signed at the time of privatisation in 1998, the agreement still has 97 years to run!

Late last year, with market speculation rife that TAB Ltd was about to launch a takover bid for the Jupiters casino group, TAB executives met with Hartnell, in his capacity as chairman of NSW Racing, the company formed to act as a conduit between TAB Ltd and racing’s three codes, horseracing, dogs and trots. Sources say they bluntly told him they were unhappy about having to offer NSW Racing a 25% share in the Jupiters deal and wanted out of the “co-investment” clause.

Hartnell instead offered a straight 10% equity share in the TAB (current market capitalisation $1,660m) in return for rescinding the “co-investment” clause. However, sources say TAB executives viewed the racing industry offer as “little short of blackmail” and that Pemberton himself intervened, abruptly rejecting the offer and calling off the negotiations.

Thus it’s no surprise that TRB chief executive Merv Hill views the  TAB’s Wentworth briefing as “just bully boy tactics because they can’t get their own way.”

“The co-investment clause is in there, it’s our right, and we aren’t simply going to give it away because it suits the TAB commercially. We want them to advance, but we have a right to be part of that growth. We are keen to secure an income stream not related to wagering and to do it in partnership with the TAB, but they have to realise that each is dependent on the other, and that we have a responsibility to look after an entire industry, not just a shareprice.”

With 97 years to run in the current agreement, the racing industry, for the time being, would appear to hold the whip hand. “Well,” says Hill, “If we weren’t in a strong negotiating position they wouldn’t be out there trying to whip up sentiment against us!”

In a speech to the Carbine Club on the eve of this year’s Golden Slipper in April, Hartnell also reiterated the racing industry’s commitment to the “co-invest” clause, branding the TAB “an economic rationalist with the sole aim of maximising shareholder wealth.”

With this imperative, Hartnell characterised the TAB’s grand plan for racing was to “close down race clubs, race tracks, reduce administration, and consolidate the remaining raceclubs around far few facilities which have more money to support…

“TAB Ltd now regards racing as ‘product’, nothing more or less. It has very little sympathy for how ‘product’ comes into existence, or the role or social obligations of racing.”

Certainly the TAB’s Wentworth briefing has done nothing to change the TRB’s view, however Pemberton maintains that “commercial logic dictates that the emotion is a critical part of the ‘product’. Without it, racing is just another form of gaming with a cost structure that would send it broke!”

Pemberton’s relationship with the racing industry started rocky and has stayed that way. When he was appointed TAB chairman in August 1997 he immediately ditched racing’s preferred joint-venture model for the privatisation of the TAB.
Instead Pemberton negotiated a new agreement which returned all profits to shareholders and gave racing’s three codes a guaranteed slice of all revenue. This, he argued, would leave him running the TAB and the racing industry with an incentive to boost revenue. At the time he denied any grand designs to run racing, in turn claiming it was racing bosses "who want control of TAB bank account, advertising, all press releases - this will be a public company. Do they think the shareholders are just there to be milked?" But clearly, after three years, the TAB now realises that how racing is run is crucial to its own profitability.

Sources say, that with the TAB still having the ear of the government over the racing clubs, the ultimate aim is to ditch the traditional model of the raceclub as a community based, non-profit sporting club and replace it with American style proprietary raceclub, run as a commercial business – a system in complete synergy with a public company like TAB Ltd.

And lost in all of this, of course, is that the whole regime is paid for by ordinary punters, who are no-one’s client and everyone’s cash cow.

First published in The Bulletin

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